relief and guidance on corrections of certain …2007-100, 2007-52 irb 1243, setting forth guidance...

Part III – Administrative, Procedural, and Miscellaneous Relief and Guidance on Corrections of Certain Failures of a Nonqualified Deferred Compensation Plan to Comply with § 409A(a) in Operation Notice 2008-113 TABLE OF CONTENTS I. Purpose II. Background III. Eligibility Requirements

A. In General B. Avoidance of Recurrence of Operational Failures C. Relief not Available to Service Providers Under Examination D. Additional Eligibility Requirements E. Required Repayments by the Service Provider F. Eligibility for Relief for a Taxable Year in which the Service Recipient Experiences a Financial Downturn or Other Financial Issue G. Definition of Insider H. Determining Certain Periods of Days I. Adjustments for Earnings and Losses J. References to the Internal Revenue Code

IV. Corrections of Certain Operational Failures in the Same Taxable Year as the Failure Occurs

A. Failure to Defer Amount or Incorrect Payment of Amount Payable in a Subsequent Taxable Year Corrected in the Same Taxable Year as the Failure B. Incorrect Payment of Amount Payable in Same Taxable Year or Incorrect Payment in Violation of § 409A(a)(2)(B)(i) Corrected in the Same Taxable Year as the Failure C. Excess Deferred Amount Corrected in the Same Taxable Year D. Correction of Exercise Price of Otherwise Excluded Stock Rights

V. Corrections of Certain Operational Failures Involving Non-Insider Service Providers in the Taxable Year Immediately Following the Taxable Year in which the Failure Occurs

A. In General

B. Failure to Defer Amount or Incorrect Payment of Amount Payable in a Subsequent Taxable Year Corrected in the Taxable Year Immediately Following the Failure C. Incorrect Payment of Amount Payable in Same Taxable Year or Incorrect Payment in Violation of § 409A(a)(2)(B)(i) Corrected During Subsequent Taxable Year D. Excess Deferred Amount Corrected in the Taxable Year Immediately Following the Year of the Failure E. Correction of Exercise Price of Otherwise Excluded Stock Rights

VI. Relief for Certain Operational Failures Involving Limited Amounts

A. In General B. Failure to Defer Limited Amount not Corrected in the Same Taxable Year and Certain Erroneous Payments of Limited Amounts C. Limited Excess Deferred Amount not Corrected in the Same Taxable Year

VII. Relief for Certain Other Operational Failures

A. General Requirements B. Failure to Defer Amount not Corrected in the Same Taxable Year and Certain Erroneous Payments C. Incorrect Payment of Amount Payable in Same Taxable Year or Incorrect Payment in Violation of § 409A(a)(2)(B)(i) not Corrected in the Same Taxable Year as the Failure D. Excess Deferred Amount not Corrected in the Same Taxable Year

VIII. Special Transition Rule for Non-Insiders IX. Information and Reporting Requirements

A. Information Required with Respect to Correction of an Operational Failure in the Same Taxable Year as the Failure Occurs B. Information Required with Respect to Relief for Certain Operational Failures

X. Effect on Other Documents XI. Request for Comments XII. Paperwork Reduction Act XIII. Drafting Information I. PURPOSE

This notice provides procedures under which taxpayers can obtain relief from the

full application of the income inclusion and the additional taxes under § 409A with

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respect to certain failures of a nonqualified deferred compensation plan to comply with

§ 409A(a) in operation (an operational failure), including:

Methods for correcting certain operational failures during the service provider’s

taxable year in which the failure occurs and, for certain service providers also

during the subsequent taxable year, to avoid income inclusion under § 409A(a).

Relief limiting the amount includible in income under § 409A(a) for certain

operational failures during a service provider’s taxable year that involve only

limited amounts.

Relief limiting the amount includible in income under § 409A(a) for certain

operational failures regardless of whether the failure involves only limited

amounts, but subject to further required actions to correct the failure.

Special transition relief for certain operational failures occurring before January 1,

2008.

Comments are also requested on whether procedures for the correction of a failure

of a plan to comply with the plan document requirements of §1.409A-1(c) should be

adopted. See § XI of this notice.

II. BACKGROUND On December 3, 2007, the Treasury Department and the IRS issued Notice

2007-100, 2007-52 IRB 1243, setting forth guidance permitting the correction of certain

operational failures, and providing transition relief limiting the amount includible in

income under § 409A(a) for certain operational failures involving limited amounts.

Notice 2007-100 also described potential guidance that would limit the amount

includible in income under § 409A(a) for certain operational failures involving amounts

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that exceeded the limit. Comments were requested with respect to all aspects of the

notice. The Treasury Department and the IRS have reviewed all of the comments

submitted, and are issuing this notice as a successor to Notice 2007-100. This notice

incorporates, clarifies and expands upon the guidance provided in Notice 2007-100, and

accordingly Notice 2007-100 is obsoleted. For further information, see § X of this

notice.

III. ELIGIBILITY REQUIREMENTS

A. In General

A taxpayer is not eligible for the relief provided in §§ IV through VIII of this notice

unless all of the applicable requirements of this § III are met, as well as the

requirements of the particular section providing the applicable relief and the notice and

the reporting requirements of § IX. In each instance, the taxpayer claiming the relief

has the burden of demonstrating that the taxpayer was eligible for the relief and that the

requirements of this notice have been met. Any application of the relief provided in this

notice is subject to examination by the IRS.

B. Avoidance of Recurrence of Operational Failure

The relief provided under §§ IV through VIII of this notice is not available unless,

in addition to meeting the applicable requirements of the relevant section, the service

recipient takes commercially reasonable steps to avoid a recurrence of the operational

failure. If the same or a substantially similar operational failure has occurred previously,

the relief is not available for any taxable year of the service provider beginning after

December 31, 2009, unless the service recipient or service provider demonstrates that

the service recipient had established practices and procedures reasonably designed to

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ensure that such an operational failure would not recur and had taken commercially

reasonable steps to avoid a recurrence of the operational failure and that the

operational failure occurred despite the service recipient’s diligent efforts.

C. Relief not Available to Service Providers Under Examination

The relief provided in §§ V through VIII is not available if a federal income tax

return of the relevant service provider for the service provider’s taxable year in which

the operational failure occurred is under examination with respect to the plan. For this

purpose, an individual service provider is treated as under examination with respect to

the plan if the individual is under examination with respect to the individual’s federal

income tax return (for example, Form 1040) for the taxable year.

D. Additional Eligibility Requirements

Sections IV through VIII of this notice do not provide relief for plan terms and

provisions that fail to meet the requirements of § 409A or for operational failures that are

not described in those sections.1 The Treasury Department and the IRS are requesting

comments as to whether an additional program to address plan document failures

would be feasible and advisable (see § XI of this notice). In addition, relief is not

available under §§ IV through VIII of this notice with respect to any exercise of a stock

right that otherwise would result in a failure to comply with § 409A. Relief otherwise

available under §§ IV through VIII of this notice is conditioned upon the timely filing and

providing of the information required by § IX of this notice. The relief provided by §§ IV

1 Reliance on the transition relief provided in Notice 2007-86, 2007-46 IRB 990, the preamble to the final regulations under § 409A, 72 Fed. Reg. 19234, Notice 2006-79, 2006-43 IRB 763, the preamble to the proposed regulations under § 409A, 70 Fed. Reg. 57930, or Notice 2005-1, 2005-1 CB 274, for the years to which such transition relief applies, does not preclude a taxpayer from qualifying for the relief provided in this notice with respect to operational failures occurring in taxable years beginning before January 1, 2009.

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through VIII of this notice applies only to operational failures that are inadvertent and

unintentional. For this purpose, an inadvertent and unintentional operational failure

means a failure to comply with plan provisions that satisfy the requirements of

§ 409A(a), or an inadvertent unintentional failure to follow the requirements of § 409A(a)

in practice, due to one or more inadvertent and unintentional errors in the operation of

the plan. In addition, the relief provided in this section is not available if the failure is

directly or indirectly related to participation in any listed transaction under §1.6011-

4(b)(2)).

E. Required Repayments by the Service Provider

If to qualify for any applicable relief a service provider is required to repay to the

service recipient an amount erroneously paid or made available to the service provider,

such as required in §§ IV.A, IV.B, V.B, V.C, VII.B and VII.C, the amount erroneously

paid or made available to the service provider refers to the gross amount paid to, or on

behalf of, the service provider, before the application of any withholding requirements

such as the Federal employment tax withholding requirements. The service provider

may satisfy the requirement to repay the service recipient the amount erroneously paid

to the service provider and interest (if applicable) by paying the service recipient the

equivalent amount on or before the applicable deadline. Alternatively, in lieu of such

repayment, the service recipient may reduce the service provider’s compensation that

otherwise would have been paid on or before such applicable deadline by an equivalent

amount. To the extent that, in lieu of repayment, the service recipient reduces other

compensation that would have been paid to the service provider, the other

compensation that would have been paid to the service provider, but instead is used to

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repay the erroneous payment or interest (if applicable), is includible in income (and

wages if the service provider is an employee).

The amount will not be treated as repaid by the service provider if, in connection

with such payment, the service recipient pays the service provider, or otherwise

provides a benefit (including an obligation to pay an amount or provide a benefit in the

future), intended as a substitute for all or part of the amount the service provider is

required to repay the service recipient.

F. Eligibility for Relief for a Taxable Year in which the Service Recipient Experiences a Financial Downturn or Other Financial Issue The relief provided in §§ IV through VIII is not available with respect to any

erroneous payment occurring during any taxable year of the service provider in which

the service recipient experiences a substantial financial downturn, or otherwise

experiences financial or other issues, if such downturn or other issue indicates a

significant risk that the service recipient will not be able to pay the amount deferred

when the payment becomes due.

G. Definition of Insider

Certain sections of this notice provide additional eligibility requirements for relief,

or do not provide relief, if the affected service provider is an insider with respect to a

service recipient. For purposes of this notice, a service provider is an insider with

respect to a service recipient if the service provider is a director or officer of the service

recipient or is directly or indirectly the beneficial owner of more than 10% of any class of

any equity security of the service recipient, determined in accordance with the rules of

the Securities and Exchange Commission under § 16 of the Securities Exchange Act of

1934, as amended, 15 USC 78p, without regard to whether the service recipient has

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any class of equity securities registered under § 12 of such Act, 15 USC 78l. See 17

CFR § 240.16a-1(a) (beneficial owner) and (f) (officer). In the case of a service

recipient that is not a corporation, such rules are applied by analogy.

H. Determining Certain Periods of Days

To apply the requirements of certain sections of this notice, a period of days

must be calculated and applied. For example, the number of days that a service

provider retained amounts erroneously paid to the service provider may be required to

be calculated. For purposes of counting days under this notice, the first day of the

period is disregarded and the last day is taken into account. For example, if on June 1,

2009, a service recipient erroneously paid a service provider an amount that the service

provider repaid on June 30, 2009, there would be 29 days from the date of payment

through the date of repayment. If the period of days required to be calculated ends

upon the service provider’s repayment, and the repayment is made through a reduction

of the service provider’s other compensation, the repayment date occurs on each date

the compensation otherwise would have been paid to the service provider.

I. Adjustments for Earnings and Losses

The relief provided in certain sections of this notice permits or requires that

deferred amounts be adjusted to reflect earnings and losses, provided that such

adjustments must be made by a specified deadline. If it is impracticable to make the

adjustment by the applicable deadline, the adjustment will be treated as made if, on or

before the applicable deadline, the service provider (in the case of earnings) or the

service recipient (in the case of losses) has a legally binding right to have such

adjustment made.

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J. References to the Internal Revenue Code

For purposes of this notice, references to sections of the Internal Revenue Code

include references to any applicable guidance thereunder.

IV. CORRECTIONS OF CERTAIN OPERATIONAL FAILURES IN THE SAME TAXABLE YEAR AS THE FAILURE OCCURS A. Failure to Defer Amount or Incorrect Payment of Amount Payable in a Subsequent Taxable Year Corrected in the Same Taxable Year as the Failure 1. Relief for Amounts to which § IV.A Applies

This § IV.A applies if during a service provider’s taxable year an operational

failure occurs that is described in § IV.A.2(a) and the requirements of § IV.A.2(b)

through (d) and § IV.A.4 are met. An amount to which this § IV.A applies is treated as

having been timely deferred in accordance with the terms of the plan and any applicable

deferral election (or as having continued to be deferred under the terms of the plan).

2. Amounts to which § IV.A Applies

(a) A failure is described in this § IV.A.2(a) if an amount of nonqualified deferred

compensation that, under the terms of the plan and any applicable deferral election, and

§ 409A, should not have been paid or made available to a service provider in a taxable

year of the service provider, was erroneously paid or made available to the service

provider in that year, other than a payment that fails to meet the requirements of

§ 409A(a)(2)(B)(i) (requirement to delay for six months payments to a specified

employee upon separation from service). For rules relating to correction of certain

payments that fail to meet the requirements of § 409A(a)(2)(B)(i), see § IV.B of this

notice.

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(b) The service provider repays to the service recipient the amount that was

erroneously paid or made available to the service provider on or before the last day of

the service provider’s taxable year in which such amount was erroneously paid or made

available. If the service provider was not an insider (as defined in § III.G) at any time

during the taxable year in which such amount was erroneously paid or made available,

and if repayment of such amount would cause an immediate and heavy financial need

as defined in §1.401(k)-1(d)(3)(iii), in lieu of immediate repayment the service recipient

and the service provider may enter into a legally binding agreement to have such

amounts repaid over a specified period that ends not later than 24 months from the due

date (without extensions) for the federal income tax return for the service provider’s

taxable year during which the amount was erroneously paid or made available to the

service provider, provided that the service provider must also pay interest on the

amount repaid to the service recipient. For this purpose, the interest rate must be no

less than the short-term applicable Federal rate (AFR) under § 1274(d)(1), based on

annual compounding, for the month in which the erroneous payment was paid or made

available. If the amount paid or withheld on a repayment date is less than the entire

erroneous payment, for each repayment date the interest calculation is applied by

substituting the unpaid balance immediately before the repayment for the amount of the

erroneous payment. The repayment requirement of this § IV.A.2(b) will not be met

unless all payments (including interest) are made by the end of the period specified in

such agreement.

(c) Immediately after such repayment (or agreement to repay) the service

provider has a legally binding right under the plan to be paid the amount that would

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have been due if such amount had not been erroneously paid or made available to the

service provider during such taxable year, at the same time and in the same form of

payment that the amount would have been payable if such amount had not been

erroneously paid or made available to the service provider during such taxable year.

(d) If the total of all amounts to which this § IV.A applies that are erroneously paid

or made available under a plan (as defined for purposes of § 409A) in a service

provider’s taxable year exceeds the limit on elective deferrals that would apply to a

qualified plan under § 402(g)(1)(B) for the year in which the erroneous payment was

made and the service provider was an insider (as defined in § III.G of this notice) with

respect to the service recipient at any time during the taxable year in which the

erroneous payment was made, the service provider pays interest to the service recipient

at the time the service provider repays the amount to the service recipient equal to the

amount of the erroneous payment (E) multiplied by an interest rate that is no less than

the short-term applicable Federal rate (AFR) under § 1274(d)(1) (r) multiplied by a

fraction, the numerator of which is the number of days from the erroneous payment date

to the repayment date (n1) and the denominator of which is the number of days in such

taxable year (n2), or (E x r x n1/n2). For purposes of the preceding sentence, r is the

short-term AFR, based on annual compounding, for the month in which the erroneous

payment was paid or made available to the service provider. If the amount paid or

withheld on a repayment date is less than the entire erroneous payment, for each

repayment date the interest calculation is applied by substituting the unpaid balance

immediately before the repayment for the amount of the erroneous payment. For rules

regarding the counting of days, see § III.H of this notice.

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3. Reporting and Withholding Requirements

The amount erroneously paid to the service provider that is repaid by the service

provider to the service recipient is not required to be included in income by the service

provider, or reported as income to the service provider on a Form W-2 or Form 1099 by

the service recipient. To the extent employment taxes have been withheld and paid

with respect to such payment and would not otherwise have been due absent such

payment, appropriate adjustments should be made in accordance with the applicable

rules under § 6413. To the extent that, in lieu of repayment, the service recipient

reduces other compensation that would have been paid to the service provider, the

other compensation that would have been paid to the service provider, but instead is

used to repay the erroneous payment or to pay any required interest on the erroneous

payment, is includible in income (and wages if the service provider is an employee);

however, any employment taxes withheld and paid with respect to the original

erroneous payment may be applied to satisfy the requirement to withhold and pay

employment taxes on such compensation, in which case no adjustment to the

employment taxes previously withheld and paid should be made.

4. Adjustments for Earnings

For purposes of this § IV.A, the service provider’s account balance or other

amount of deferred compensation under the plan may be adjusted for earnings (or

losses) retroactive to the date the amount should have been credited to the service

provider’s account or otherwise deferred (or if the amount should have otherwise

remained deferred compensation after the end of the service provider’s taxable year,

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retroactive to the date the amount was paid or made available), provided that such

adjustment must be made on or before the last day of such taxable year.

5. Examples

In each of the following examples, it is assumed that Employee is an individual

whose taxable year is the calendar year and Employee and Employer both satisfy the

applicable requirements of §§ III and IX of this notice.

Example 1: Employee, who is not an insider with respect to Employer, makes a

timely election to defer 50% of a bonus payable in 2009 pursuant to an account balance

plan maintained by Employer. The bonus is $100,000. Employer erroneously defers

only 10% of the bonus, or $10,000, and pays Employee the other $90,000 in 2009

(including the $40,000 that should have been deferred). The deferral is treated as

made in accordance with the terms of the plan and the deferral election if, on or before

December 31, 2009, the additional $40,000 is credited to Employee’s account balance

and Employee pays Employer $40,000. The $40,000 erroneously paid to Employee is

not required to be included in income by Employee or reported as income by Employer

on Form W-2. Alternatively, in lieu of the $40,000 repayment by Employee to Employer,

compensation otherwise payable to Employee in 2009 (such as salary payments) may

be reduced by $40,000, provided that the $40,000 reduction in Employee’s

compensation used to repay the amount (but not the $40,000 erroneous payment) is

included in income by Employee and reported as wages by Employer on the 2009 Form

W-2. Employer may also adjust Employee’s account to reflect the earnings (or losses)

that would have been allocated to Employee’s account had the amount been timely

deferred and credited to Employee’s account balance, if such adjustment for earnings

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(or losses) is made on or before December 31, 2009. For example, if the original

$10,000 deferral would have been credited with 10% in deemed investment earnings,

the deferral plus earnings would be $11,000. This amount must be increased by the

$40,000 repaid by Employee and may also be increased by an additional $4,000

($40,000 multiplied by 10%), to result in the $55,000 account balance that would have

been reflected had the amount been properly deferred. If the original incorrect deferral

would have been charged with 10% in deemed investment losses, the deferral less

losses would be $9,000. This account balance must be increased by the $40,000, but

may also be reduced by $4,000, for a net increase of $36,000, to result in the $45,000

account balance that would have been reflected had the amount been properly

deferred.

Example 2: Employee, who is an insider with respect to Employer, makes a

timely election to defer 80% of a $100,000 bonus payable on July 1, 2010, pursuant to

an account balance plan maintained by Employer. Employer erroneously defers only

10% of the bonus, or $10,000, and pays Employee the other $90,000 (including

$70,000 that should have been deferred) on July 1, 2010. Assume for purposes of this

example that the short-term AFR, based on annual compounding, for July 2010 is 4.0%.

Employer notifies Employee of the error and Employee pays Employer $70,705.75 on

October 1, 2010, consisting of the $70,000 erroneous payment plus interest equal to

$705.75 ($70,000 x .04 x 92/365) (because the erroneous payment exceeds the limit on

elective deferrals that would apply to a qualified plan under § 402(g)(1)(B) for 2010 and

Employee is an insider). The $70,000 is not required to be included in income by

Employee or reported as income by Employer on Form W-2. Alternatively, in lieu of the

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$70,705.75 payment by Employee to Employer, compensation otherwise payable to

Employee in 2010 (such as salary payments) may be reduced by $70,000 plus

applicable interest, in which case the reduction in Employee’s compensation used to

repay the amount plus applicable interest (but not the erroneous $70,000 payment)

must be reported by Employer as wages on the 2010 Form W-2 issued to Employee

and included in Employee’s income for 2010. Employer may also adjust Employee’s

account to reflect the earnings that would have been allocated to Employee’s account

had the amount been timely deferred and credited to Employee’s account balance, if

such adjustment for earnings is made on or before December 31, 2010. Employer must

include in income any interest paid to Employer.

B. Incorrect Payment of Amount Payable in Same Taxable Year or Incorrect Payment in Violation of § 409A(a)(2)(B)(i) Corrected in the Same Taxable Year as the Failure 1. Relief for Amounts to which § IV.B Applies

With respect to an amount to which this § IV.B applies, the service provider will

not be treated as having failed to comply with § 409A(a)(2)(B)(i) (if applicable) and the

terms of the plan and any applicable deferral election as a result of the amount being

paid or made available at the earlier date.

2. Amounts to which § IV.B Applies

This § IV.B applies if during a service provider’s taxable year an operational

failure occurs that is described in § IV.B.2(a) and the requirements of § IV.B.2(b) and

§ IV.B.4 are met.

(a) A failure is described in this § IV.B.2(a) if an amount of nonqualified deferred

compensation that, under the terms of the plan and any applicable deferral election,

should not have been paid or made available to a service provider until a later date in

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the same taxable year, was erroneously paid or made available to the service provider

more than 30 days before such later due date, or an amount of nonqualified deferred


§ 409A(a)(2)(B)(i) (requirement to delay for six months payments to a specified

employee upon separation from service) and the applicable guidance, (i) would have

been payable during the six months following the service provider’s separation from

service if the service provider had not been a specified employee, (ii) because the

service provider was a specified employee the amount should not have been paid or

made available to a service provider within the six months after the service provider’s

separation from service, and (iii) such amount was erroneously paid or made available

to the service provider during such six-month period.

(b) On or before the last day of the service provider’s taxable year in which the

amount was paid or made available, the service provider repays to the service recipient

the amount that was erroneously paid or made available to the service provider, and

immediately after such repayment the service provider has a legally binding right to

receive such amount from the service recipient on the date that (i) if the repayment is

made on or before the date the amount would otherwise have been payable under the

terms of the plan and the applicable deferral election, is the same number of days after

the date the amount would otherwise have been payable as the number of days from

the date the service recipient made the erroneous payment to the service provider

through the date the service provider repaid the erroneous payment to the service

recipient, and (ii) if the repayment is made after the date the amount would otherwise

have been payable under the terms of the plan and the applicable deferral election, is

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the same number of days after the date the amount is repaid as the number of days

from the date the service recipient made the erroneous payment to the service provider

through the date the amount would otherwise have been payable under the terms of the

plan and the applicable deferral election. For rules regarding the counting of days, see

§ III.H of this notice.


If the requirements of this § IV.B are met, the original payment from the service

recipient to the service provider that has been repaid to the service recipient is not

required to be reported as income on Form W-2 or Form 1099, as applicable. To the

extent employment taxes have been withheld and paid with respect to such payment,

and would not otherwise have been due absent such payment, appropriate adjustments

should be made under the applicable rules under § 6413. However, the subsequent

payment of the amount by the service recipient to the service provider is required to be

reported appropriately as income on Form W-2 or Form 1099, as applicable, and

subject to the applicable employment taxes. If the payment is deductible by the service

recipient, the taxable year in which such deduction is allowable will be determined in

accordance with § 404(a)(5) and the service recipient’s method of accounting.

4. Adjustment for Earnings

For purposes of this § IV.B, the service provider’s account balance or other

amount of deferred compensation under the plan may not be adjusted for earnings, but

may be adjusted for losses, retroactive to the date the amount was erroneously paid or

made available, provided that such adjustment must be made on or before the

applicable deadline for repayment.

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5. Examples

In each of the following examples, it is assumed that Specified Employee is an

individual whose taxable year is the calendar year, at all relevant times Specified

Employee is a specified employee of Employer for purposes of § 409A(a)(2)(B)(i), and

Specified Employee and Employer both satisfy the applicable requirements of §§ III and

IX of this notice.

Example 1: Under a nonqualified deferred compensation plan sponsored by

Employer, Specified Employee has a legally binding right to a payment of deferred

compensation on the first day of the seventh month following Specified Employee’s

separation from service. Specified Employee separates from service on December 15,

2008, so that the payment is due on July 1, 2009. Employer erroneously pays Specified

Employee the amount of deferred compensation on March 1, 2009 (122 days before the

original payment due date). Employer discovers the error on May 1, 2009, and

Specified Employee repays the amount to Employer on June 1, 2009 (92 days after the

erroneous payment). Provided that immediately after such repayment Specified

Employee has a legally binding right to receive the amount from Employer on

October 1, 2009 (92 days after the July 1, 2009 original payment due date) and

Employer does not repay the amount to Specified Employee before that date, Specified

Employee will not be treated as having failed to comply with § 409A(a)(2)(B)(i) and the

terms of the plan and the applicable deferral election solely as a result of the early

payment.


Employer, Specified Employee has a legally binding right to a payment of deferred

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compensation payable as a lump sum payment December 1, 2009 (and so not subject

to the six-month delay requirement of § 409A(a)(2)(B)(i)). Employer erroneously pays

Specified Employee the amount of deferred compensation on September 1, 2009 (91

days early). Employer discovers the error and Specified Employee repays the amount

to Employer on November 1, 2009 (61 days after the erroneous payment). Provided

that immediately after such repayment Specified Employee has a legally binding right to

receive the amount from Employer on January 31, 2010 (61 days after the original

payment due date) and Employer does not repay the amount to Specified Employee

before that date, Specified Employee will not be treated as having failed to comply with

the terms of the plan and the applicable deferral election solely as a result of the early

payment. The erroneous payment is not includible in Specified Employee’s income,

and is not required to be reported as income on the 2009 Form W-2. Such amount is

includible in Specified Employee’s income in the year in which the amount is repaid by

Employer to Specified Employee, and is required to be reported as income on that

year’s Form W-2 and subject to applicable income taxes.

C. Excess Deferred Amount Corrected in the Same Taxable Year

1. Relief for Amounts to which § IV.C Applies

An excess amount to which this § IV.C applies is not treated as an amount

deferred under the plan.

2. Amounts to which § IV.C Applies

This § IV.C applies if during a service provider’s taxable year an operational

failure occurs that is described in §§ IV.C.2(a) and the requirements of § IV.C.2(b) and

(c) and § IV.C.3 are met.

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(a) A failure is described in this § IV.C.2(a) if, under the terms of a plan and an

applicable deferral election, and § 409A, an amount that should not have been deferred

compensation under the plan is erroneously credited to the service provider’s account

or otherwise treated as deferred compensation under the plan, and such excess amount

otherwise would have been paid to the service provider during the service provider’s

taxable year in which the excess amount was incorrectly credited to the service

provider’s account or otherwise treated as deferred compensation under the plan.

However, a service recipient’s failure to timely pay in the proper taxable year of a

service provider amounts that were deferred in one or more previous taxable years of

the service provider is not a failure described in this § IV.C.2(a), but see § 1.409A-3(d)

for certain circumstances under which such payments may be treated as made in

accordance with a designated payment date.

(b) The excess amount is paid to the service provider on or before the last day of

the service provider’s taxable year in which the excess amount was incorrectly treated

as deferred compensation.

(c) The amount to which the service provider has a legally binding right under the

plan at the end of the year is adjusted to reflect the payment (for example, through a

reduction in the account balance). The service recipient may (but is not required to) pay

reasonable interest to (or otherwise reasonably compensate) the service provider to

reflect the time value of money with respect to the late payment, provided that such

interest or other compensation is paid or made available by the end of the service

provider’s taxable year in which such amount was incorrectly treated as deferred

compensation under the plan.

20


If the service provider was an insider with respect to the service recipient (as

defined in § III.G of this notice) at any time during the service provider’s taxable year

during which the failure occurred, the remaining account balance (or other deferred

compensation under the plan) is adjusted for earnings retroactive to the date the excess

amount was incorrectly credited to the service provider’s account or otherwise

incorrectly treated as deferred under the plan, provided that such adjustment must be

made on or before the last day of the service provider’s taxable year in which such

amount was incorrectly treated as deferred compensation under the plan. If the service

provider was not an insider, such adjustment may be made (but is not required). If the

amount was subject to losses, the remaining account balance (or other deferred

compensation under the plan) is not required to be adjusted, but may be adjusted for

such losses retroactive to the date the excess amount was incorrectly credited to the

service provider’s account or otherwise incorrectly treated as deferred under the plan,

provided that such adjustment must be made on or before the last day of the service

provider’s taxable year in which such amount was incorrectly treated as deferred

compensation under the plan.

4. Example

In the following example, it is assumed that Employee is an individual whose

taxable year is the calendar year and Employee and Employer both satisfy the


Example: Employee, who is an insider with respect to Employer and whose

taxable year is the calendar year, makes a timely election pursuant to an account

21

balance plan to defer 10% of a bonus otherwise payable in 2008. The bonus is

$100,000. Employer erroneously defers 50% of the bonus, or $50,000, and pays

Employee $50,000 (instead of deferring $10,000 and paying Employee $90,000). The

excess $40,000 will not be treated as deferred under the plan if on or before December

31, 2008, Employer pays Employee $40,000 of the account balance under the plan.

The remaining account balance must be adjusted for earnings and may be adjusted for

losses that were allocable to such amount under the plan. Employer may (but is not

required to) pay Employee reasonable interest on the $40,000 erroneous deferral

provided such payment is made by December 31, 2008.

D. Correction of Exercise Price of Otherwise Excluded Stock Rights

1. Relief for Amounts to which § IV.D Applies

If this § IV.D applies to a stock right, the stock right is treated from the date of

grant as not providing for a deferral of compensation for purposes of § 409A.

2. Amounts to which § IV.D Applies.

This § IV.D applies if during a service provider’s taxable year a failure occurs that

is described in § IV.D.2(a) and the requirements of § IV.D.2(b) are met.

(a) A failure is described in this § IV.D.2(a) if, under the terms of a stock right,

the stock right would not provide for a deferral of compensation under § 1.409A-

1(b)(5)(i)(A) (excluded stock options) or § 1.409A-1(b)(5)(i)(B) (excluded stock

appreciation rights), except that the exercise price of the stock right is erroneously

established at less than the fair market value of the underlying stock on the date of

grant.

22

(b) Before the stock right is exercised and not later than the last day of the

service provider’s taxable year in which the service recipient granted the service

provider the stock right, the exercise price is reset to an amount not less than the fair

market value of the underlying stock on the date of grant.

3. Example


taxable year is the calendar year and Employee and Employer both satisfy the


Example: On January 1, 2009, Employer grants Employee a stock option to

purchase 100 shares of stock, and the stock option otherwise would not provide for a

deferral of compensation for purposes of § 409A except that due to an error the

exercise price is set at an amount below the fair market value of the stock on January 1,

2009. On July 1, 2009, Employee partially exercises the stock option and purchases 40

shares, but retains a stock option to purchase 60 shares. Provided that before the

earlier of January 1, 2009 or the exercise of the remaining stock option to purchase 60

shares, the exercise price of the stock option to purchase 60 shares is reset to a price at

or above the fair market value of the underlying stock on January 1, 2009, the stock

option to purchase 60 shares may qualify for the relief provided in this section. Because

the exercise price was not reset before the exercise on July 1, 2009, the portion of the

stock option that was exercised to purchase 40 shares is not eligible for the relief

provided in this section.

23

V. CORRECTIONS OF CERTAIN OPERATIONAL FAILURES INVOLVING NON-INSIDER SERVICE PROVIDERS IN THE TAXABLE YEAR IMMEDIATELY FOLLOWING THE TAXABLE YEAR IN WHICH THE FAILURE OCCURS A. In General

The relief provided in this § V is available only with respect to service providers

that are not insiders as defined in § III.G of this notice at any time during the service

provider’s taxable year in which the operational failure occurs, or at any time during the

immediately following taxable year. The relief is available with respect to such service

providers regardless of whether the same or a substantially similar failure occurred with

respect to a service provider that is an insider, but in no case is the relief available with

respect a service provider that is an insider at any time during either taxable year. For

example, if an operational failure under an arrangement results in two erroneous

$10,000 payments, one to a service provider that is an insider and one to a service

provider that is not an insider, the relief provided in this § V may be available with

respect to the service provider that is not an insider (provided that all other requirements

are met), but is not available with respect to the service provider that is an insider. The

relief provided in this § V may be available regardless of whether relief is also available

under § VI or VII of this notice, so that the relief provided in this section may be utilized

in lieu of the relief otherwise available under § VI or VII of this notice.

B. Failure to Defer Amount or Incorrect Payment of Amount Payable in a Subsequent Taxable Year Corrected in the Taxable Year Immediately Following the Failure 1. Relief for Amounts to which § V.B Applies

An amount to which this § V.B applies is treated as having been timely deferred

in accordance with the terms of the plan and any applicable deferral election (or as

having continued to be deferred under the terms of the plan).

24

2. Amounts to which § V.B Applies

This § V.B applies if during a service provider’s taxable year an operational

failure that is described in § V.B.2(a) and the requirements of § V.B.2(b) through (d) and

§§ V.B.3 and 4 are met.

(a) A failure is described in this § V.B.2(a) if an amount of nonqualified deferred



year of the service provider, erroneously was paid or made available in that year, and

such payment is not a payment that fails to meet the requirements of § 409A(a)(2)(B)(i)

(requirement to delay for six months payments to a specified employee upon separation

from service).

(b) The service provider repays to the service recipient the amount that was

erroneously paid or made available to the service provider during the service provider’s

taxable year immediately following the taxable year in which such amount was

erroneously paid or made available. If repayment of such amount would cause an

immediate and heavy financial need as defined in §1.401(k)-1(d)(3)(iii), the service

recipient and the service provider may enter into a legally binding agreement to have

such amounts repaid over a specified period that ends not later than 24 months from

the due date (without extensions) for the federal income tax return for the service

provider’s taxable year during which the amount was erroneously paid or made

available to the service provider. However, the repayment requirement of this

§ IV.B.2(d) will not be met unless all payments are made by the end of the period

specified in such agreement. If the amount erroneously paid or made available to the

25

service provider is otherwise payable under the terms of the plan during the subsequent

taxable year during which repayment would be required under this § V.B.2(b), no

repayment is required. However, the service provider must pay the interest payment

set forth in § V.B.2(d) below assuming that the first date during the subsequent taxable

year at which the amount otherwise could have been paid in compliance with the plan

terms is the date of repayment.

(c) Immediately after such repayment (or agreement to repay), the service

provider has a legally binding right under the plan to be paid the amount that would

have been due if such amount had not been erroneously paid or made available to the

service provider during such taxable year, at the same time and in the same form of

payment that the amount would have been payable if such amount had not been

erroneously paid or made available to the service provider during such taxable year.

(d) The service provider pays interest to the service recipient at the time the

service provider repays the amount to the service recipient with interest at a rate not

less than the short-term applicable Federal rate (AFR) under § 1274(d)(1), based on

annual compounding, for the month in which the erroneous payment was paid or made

available, compounded as of the end of the service provider’s taxable year. For this

purpose, the interest rate is the short-term AFR for the month in which the erroneous

payment was paid or made available. If the amount paid on a repayment date is less

than the entire erroneous payment, for each repayment date the interest calculation is

applied by substituting the unpaid balance immediately before the repayment for the

amount of the erroneous payment.


26

The amount erroneously paid to the service provider that is repaid by the service

provider to the service recipient is required to be included in income by the service

provider, and reported as income to the service provider on a Form W-2 or Form 1099

by the service recipient, for the year in which the erroneous payment is made. As part

of the relief provided by this section, the service provider is permitted to take a

deduction in determining adjusted gross income equal to the repayment to the service

recipient (but not including any interest payment), but is required to include the

subsequent payment in income (and the service recipient is required to report the

amount as income on Form W-2 or Form 1099). To the extent that, in lieu of

repayment, the service recipient reduces other compensation that would have been

paid to the service provider, the other compensation that would have been paid to the

service provider but that instead is used to repay the erroneous payment or to pay any

required interest on the erroneous payment, is includible in income (and wages if the

service provider is an employee); however, with respect to the amount repaid (excluding

any interest payment), the service provider is permitted to take a deduction in

determining adjusted gross income for the amount of the repayment.


For purposes of this § V.B, the service provider’s account balance or other






27

adjustment must be made on or before the last day of the taxable year in which the

repayment is made.

5. Example


taxable year is the calendar year, at all relevant times Employee is not an insider as

defined in § III.G of this notice, and Employee and Employer both satisfy the applicable

requirements of §§ III and IX of this notice.

Example: Employee makes a timely election to defer 20% of a $100,000 bonus

payable on July 1, 2010, pursuant to an account balance plan maintained by Employer.

Employer erroneously defers only 10% of the bonus, or $10,000, and pays Employee

the other $90,000 (including $10,000 that should have been deferred) on July 1, 2010.

Assume for purposes of this example that the short-term AFR for July 2010 is 4.0%.

Employer notifies Employee of the error and Employee pays Employer $10,582.01 on

October 1, 2011, consisting of the $10,000 erroneous payment plus $505.73 interest.2

The deferral is treated as made in accordance with the terms of the plan under this §

V.B. For 2010, the $10,000 payment is required to be included in income by Employee

and reported as wages by Employer on the 2010 Form W-2. For 2011, Employee may

take a deduction with respect to the $10,000 repayment in determining adjusted gross

income, but may not deduct the interest payment. Alternatively, in lieu of the

$10,582.01 payment by Employee to Employer, compensation otherwise payable to

Employee in 2011 (such as salary payments) may be reduced by $10,000 plus

applicable interest, in which case the reduction in Employee’s compensation used to

2 Interest during 2010 = ($10,000 x (183/365) x 4.0%) = $200.55. Interest during 2011 = ($10,200.55 x (273/365) x 4.0%) = $305.18. Total interest = $200.55 + $305.18 = $505.73.

28

repay the amount plus applicable interest must be reported by Employer as wages on

the 2011 Form W-2 issued to Employee and included in Employee’s income for 2011.

In such a case, Employee may take a deduction with respect to the $10,000 repayment

in determining adjusted gross income, but may not deduct the interest payment.

Employer may also adjust Employee’s account to reflect the earnings that would have

been allocated to Employee’s account had the amount been timely deferred and

credited to Employee’s account balance, if such adjustment for earnings is made on or

before December 31, 2011.

C. Incorrect Payment of Amount Payable in Same Taxable Year or Incorrect Payment in Violation of § 409A(a)(2)(B)(i) Corrected During Subsequent Taxable Year 1. Relief for Amounts to which § V.C Applies

With respect to an amount to which this § V.C applies, the service provider will

not be treated as having failed to comply with § 409A(a)(2)(B)(i) (if applicable) and the

terms of the plan and any applicable deferral election as a result of the amount being

paid or made available as described in § V.C.2(a) of this notice.

2. Amounts to which § V.C Applies

This § V.C applies if during a service provider’s taxable year an operational

failure occurs that is described in § V.C.2(a) and the requirements of § V.C.2(b) and (c)

and §§ V.C.3 and 4 are met.

(a) A failure is described in this § V.C.2(a) if an amount of nonqualified deferred



the same taxable year, was erroneously paid or made available to the service provider

during such taxable year but more than 30 days before such later due date, or an

29

amount of nonqualified deferred compensation that, under the terms of the plan and any

applicable deferral election, and § 409A(a)(2)(B)(i) (requirement to delay for six months

payments to a specified employee upon separation from service), (i) would have been

payable during the six months following the service provider’s separation from service if

the service provider had not been a specified employee, (ii) because the service

provider was a specified employee the amounts should not have been paid or made

available to a service provider within six months after the service provider’s separation

from service, and (iii) such amount was erroneously paid or made available to the

service provider before the expiration of such six-month period.

(b) On or before the last day of the service provider’s taxable year immediately

following the taxable year in which the amount was paid or made available, the service

provider repays to the service recipient the amount that was erroneously paid or made

available to the service provider.

(c) Immediately after such repayment the service provider has a legally binding

right to receive such amount from the service recipient on the date that is the same

number of days after the date the amount is repaid as the number of days from the date

the service recipient made the erroneous payment to the service provider through the

date the amount would otherwise have been payable under the terms of the plan and

the applicable deferral election. For rules regarding the counting of days, see § III.H of

this notice.


If the requirements of this § V.C are met, the original payment from the service

recipient to the service provider that has been repaid to the service recipient is required

30

to be reported as income on Form W-2 or Form 1099, as applicable. If the repayment

by the service provider to the service recipient and the subsequent payment from the

service recipient to the service provider both occur within the same taxable year of the

service provider, the service provider is not permitted to deduct the repayment, but also

is not required to include the subsequent payment in income (and the service recipient

is not required to report the amount as income on Form W-2 or Form 1099). As part of

the relief provided in this section, if the repayment by the service provider to the service

recipient and the subsequent payment from the service recipient to the service provider

do not occur within the same taxable year of the service provider, the service provider is

permitted a deduction in determining adjusted gross income equal to the amount of the

repayment, but is required to include the subsequent payment in income (and the

service recipient is required to report the amount as income on Form W-2 or Form

1099). To the extent that, in lieu of repayment, the service recipient reduces other

compensation that would have been paid to the service provider, the other

compensation that would have been paid to the service provider, but instead is used to

repay the erroneous payment is includible in income (and wages if the service provider

is an employee); however, with respect to the amount repaid, the service provider is

permitted a deduction in determining adjusted gross income equal to the amount of the

repayment.


For purposes of this § V.C, the service provider’s account balance or other



31



5. Example


taxable year is the calendar year, Employee is not an insider as defined in § III.G of this

notice at all relevant times, and Employee and Employer both satisfy the applicable


Example: Under a nonqualified deferred compensation plan sponsored by

Employer, Employee has a legally binding right to a payment of deferred compensation

on the specified date of July 1, 2009. Employer erroneously pays Employee the amount

of deferred compensation on May 1, 2009 (61 days before the original payment due

date). Employer discovers the error on August 1, 2010, and Employee repays the

amount to Employer on August 1, 2010. Provided that immediately after such

repayment Employee has a legally binding right to receive the amount from Employer

on October 1, 2010 (61 days after the August 1, 2010 repayment date) and Employer

does not repay the amount to Employee before that date, Employee will not be treated

as having failed to comply with the terms of the plan and the applicable deferral election

solely as a result of the early payment.

D. Excess Deferred Amount Corrected in the Taxable Year Immediately Following the Year of the Failure 1. Relief for Amounts to which § V.D Applies

An excess amount to which this § V.D applies is not treated as an amount

deferred under the plan.

2. Amounts to which § V.D. Applies

32

This § V.D applies if during a service provider’s taxable year an operational

failure occurs that is described in § V.D.2(a) and the requirements of § V.D.2(b) through

(d) and § V.D.3 are met.

(a) A failure is described in this § V.D.2(a) if, under the terms of a plan and an

applicable deferral election, and § 409A, an amount that should not have been deferred

compensation under the plan is erroneously credited to the service provider’s account

or otherwise treated as deferred compensation under the plan, and such excess amount

otherwise would have been paid to the service provider during the service provider’s

taxable year in which the excess amount was incorrectly credited to the service

provider’s account or otherwise treated as deferred compensation under the plan.

(b) The excess amount is paid to the service provider during the service

provider’s taxable year immediately following the taxable year in which the excess

amount was incorrectly treated as deferred compensation.

(c) The amount to which the service provider has a legally binding right under

the plan at the end of such immediately following taxable year is adjusted to reflect the

payment (for example, through a reduction in the account balance).

(d) The service recipient does not pay interest to (or otherwise compensate) the

service provider to reflect the time value of money with respect to the late payment.


The remaining account balance (or other deferred compensation under the plan)

must be adjusted for earnings and may be adjusted for losses retroactive to the date the

excess amount was incorrectly credited to the service provider’s account or otherwise


33


amount was incorrectly treated as deferred compensation under the plan.

4. Example


taxable year is the calendar year, at all relevant times Employee is not an insider as

defined in § III.G of this notice, and Employee and Employer both satisfy the applicable


Example: Employee makes a timely election pursuant to an account balance

plan to defer 10% of a bonus otherwise payable in 2010. The bonus is $100,000.

Employer erroneously defers 20% of the bonus, or $20,000, and pays Employee

$80,000 (instead of deferring $10,000 and paying Employee $90,000). Employer pays

Employee $10,000 of the account balance under the plan on July 1, 2011. Provided

that Employee includes in income the $10,000 payment in 2011, Employee is not

required to include any amount in income under § 409A. The remaining account

balance must be adjusted for earnings and may be adjusted for losses that were

allocable to such $10,000 amount under the plan. However, Employer may not pay

Employee interest on the $10,000 erroneous deferral or otherwise compensate

Employee for the loss of the use of such funds.

E. Correction of Exercise Price of Otherwise Excluded Stock Rights

1. Relief for Amounts to which § V.E Applies

If this § V.E applies to a stock right, the stock right is treated from the date of

grant as not providing for nonqualified deferred compensation for purposes of § 409A.

2. Amounts to which § V.E. Applies

34

This § V.E applies if during a service provider’s taxable year a failure occurs that

is described in § V.E.2(a) and the requirements of § V.E.2(b) are met.

(a) A failure is described in this § V.E.2(a) if, under the terms of a stock right, the

stock right would not provide for a deferral of compensation under § 1.409A-1(b)(5)(i)(A)

(excluded stock options) or § 1.409A-1(b)(5)(i)(B) (excluded stock appreciation rights),

except that the exercise price of the stock right is erroneously established at less than

the fair market value of the underlying stock on the date of grant.

(b) Before the stock right is exercised and not later than the last day of the

service provider’s taxable year immediately following the service provider’s taxable year

in which the service recipient granted the service provider the stock right, the exercise

price is reset to an amount equal to or exceeding the fair market value of the underlying

stock on the date of grant, and at all times before such increase in the exercise price the

stock right otherwise would not have provided for a deferral of compensation for

purposes of § 409A.

3. Example


taxable year is the calendar year, Employee is not an insider as defined in § III.G of this

notice at all relevant times, and Employee and Employer both satisfy the applicable


Example. On January 1, 2009, Employer grants Employee a stock option to

purchase 100 shares of stock, and the stock option otherwise would not provide for a

deferral of compensation under § 409A except that due to an administrative error the

exercise price is set at an amount below the fair market value of the stock on January 1,

35

2009. On July 1, 2010, Employee partially exercises the stock option and purchases 40

shares, but retains a stock option to purchase 60 shares. Provided that before the later

of January 1, 2011 or the date the remaining stock option to purchase 60 shares is

exercised, the exercise price of the stock option to purchase 60 shares is reset to a

price at or above the fair market value of the underlying stock on January 1, 2009, the

stock option to purchase 60 shares may qualify for the relief provided in this section.

Because the exercise price was not reset before the July 1, 2010 exercise, the portion

of the stock option that was exercised to purchase 40 shares is not eligible for the relief

provided in this section.

VI. RELIEF FOR CERTAIN OPERATIONAL FAILURES INVOLVING LIMITED AMOUNTS A. In General

If an operational failure to comply with § 409A(a) occurs, but the operational

failure qualifies for the relief provided in this § VI and the taxpayer meets the

requirements of this § VI, the amount required to be included in income under § 409A(a)

as a result of the failure, and the resulting additional taxes under § 409A, are limited in

accordance with the provisions of this section. The relief provided by this section is not

available with respect to any failure unless all of the requirements of this section

(including any applicable requirement to file an original or amended return, but not

including the requirements of § IX of this notice) have been satisfied not later than the

end of the second taxable year of the service provider following the taxable year of the

service provider in which such failure occurred. The relief provided in this section is

available even if additional relief would otherwise be available under § V or § VII of this

36

notice if certain further actions were taken, so that the relief provided in this section may

be utilized in lieu of the relief otherwise available under § V or § VII of this notice.

B. Failure to Defer Limited Amount not Corrected in the Same Taxable Year and Certain Erroneous Payments of Limited Amounts

1. Relief for Amounts to which § VI.B Applies

With respect to an amount to which § VI.B applies, the amount includible in

income under § 409A(a) as a result of a payment described in § VI.B.2(a) is limited to

the amount that should have been treated as deferred compensation under the plan (or

should have continued to be deferred compensation under the plan) but was instead

paid or made available to the service provider, and does not include any other amounts

deferred under the plan. In addition, with respect to such amount includible in income

under § 409A(a), the service provider is required to pay the additional tax under

§ 409A(a)(1)(B)(i)(II) (the additional 20% tax), but is not required to pay the additional

tax under § 409A(a)(1)(B)(i)(I) (the premium interest tax).

2. Amounts to which § VI.B Applies

This § VI.B applies if during a service provider’s taxable year an operational

failure occurs that is described in § IV.B.2(a) and the requirements of § IV.B.2(b) and (c)

and § VI.B.3 are met.

(a) A failure is described in this § IV.B.2(a) if an amount should have been

treated as deferred compensation under the terms of the plan and any applicable

deferral election, and § 409A, but the amount was not credited to the service provider’s

account or otherwise treated as deferred compensation during the service provider’s

taxable year, or did not remain deferred compensation after the end of such year, and

because the amount was not credited to the service provider’s account or otherwise

37

treated as deferred compensation under the plan during such year, or did not remain

deferred compensation under the plan after the end of such year, the amount was paid

or made available to the service provider during the service provider’s taxable year. For

purposes of this section, a payment of an amount (including a payment of an amount

that is one of a series of installment payments or life annuity payments) that (a) under

the terms of the plan and § 409A(a)(2)(B)(i) is required to be delayed for at least six

months following a separation from service, but is paid within that six-month-period, or

(b) is paid in the same taxable year in which the amount was payable under the plan,

but more than 30 days before such due date, may be treated as the payment of an

amount that should have continued to be deferred compensation.

(b) Sections IV.A, IV.B, V.B, V.C, VII.B and VII.C of this notice do not apply

because relief is not available under such sections with respect to the failure, the failure

is not corrected under such sections, or otherwise.

(c) The amount paid or made available to the service provider does not exceed

the limit on elective deferrals that would apply to a qualified plan under § 402(g)(1)(B)

for the year of the operational failure. For purposes of this section, the plan includes

any arrangements treated as a single plan under § 1.409A-1(c), so that this section will

apply only if any and all erroneous payments under the plan, in the aggregate, of

amounts that otherwise should have been treated as deferred compensation with

respect to the service provider during the taxable year (or should have continued to be

deferred compensation during the taxable year), do not exceed the limit on elective

deferrals that would apply to a qualified plan under § 402(g)(1)(B) for such year.

3. Reporting and Filing Requirements

38

The service recipient must report such payment on a Form W-2 (or Form W-2c)

or Form 1099 (or corrected Form 1099), as applicable, as an amount includible in

income under § 409A for the year in which the payment was made, including reporting

such amount on a Form W-2, Box 12 using Code Z, if applicable. The service provider

must include such amount in income on and pay the additional taxes under § 409A as

described in this section with an original or amended federal income tax return for the

taxable year in which the payment was made.

4. Examples

It is assumed for purposes of the following examples that Employee is an

individual whose taxable year is the calendar year and Employee and Employer both

satisfy the applicable requirements of §§ III and IX of this notice.

Example 1: Employee makes a timely election to defer 10% of a bonus payable

in 2008 pursuant to an account balance plan. The bonus is $100,000. Employer

erroneously defers only 8% of the bonus, or $8,000, and pays Employee $92,000

(instead of deferring $10,000 and paying Employee $90,000). Employer discovers the

error on February 1, 2010. As a payment to Employee, Employer must treat the amount

as a wage payment for employment tax and reporting purposes, as appropriate,

including reporting as income and wages on the 2008 Form W-2. Employer is permitted

to report as income under § 409A on the 2008 Form W-2 (or 2008 Form W-2c), Box 12,

using Code Z, only $2,000, and Employee is permitted to include in income under

§ 409A for 2008 only $2,000. Furthermore, Employee is permitted to pay the additional

20% tax only with respect to the $2,000 (or $400 in additional income tax), and is not

required to pay the premium interest tax. However, to qualify for the relief, Employee

39

must file an original or amended 2008 income tax return reflecting the additional tax on

or before December 31, 2010.

Example 2: Employee is a specified employee entitled under a nonqualified

deferred compensation plan to a life annuity commencing upon the first day of the

seventh month following the specified employee’s separation from service. The annuity

payments are $5,000 per month. Employee separates from service on April 18, 2008,

and is scheduled to receive an initial annuity payment on November 1, 2008. Due to a

miscalculation of the specified employee’s separation from service date, Employee

receives a $5,000 payment on October 1, 2008, before the end of the six-month period

following Employee’s separation from service. Employer and Employee do not discover

the error until 2010. Employer must treat the amount paid to Employee as a wage

payment for employment tax and reporting purposes, as appropriate, including reporting

as income on the 2008 Form W-2. Employer is permitted to report as income under

§ 409A on the 2008 Form W-2 (or 2008 Form W-2c), Box 12, using Code Z, only

$5,000, and Employee is permitted to include in income under § 409A in 2008 only

$5,000. Furthermore, Employee is permitted to pay the additional 20% tax only with

respect to the $5,000 (or $1,000 in additional income tax), and is not required to pay the

premium interest tax. However, to qualify for the relief, Employee must file an original

or amended 2008 income tax return reflecting the additional tax on or before December

31, 2010.

C. Limited Excess Deferred Amount not Corrected in the Same Taxable Year

1. Relief for Amounts to which § VI.C Applies

40

With respect to amounts to which § VI.C applies, the amount includible in income

under § 409A(a) as a result of an operational failure described in § VI.C.2(a) is limited to

the excess amount paid to the service provider, and does not include any other deferred

compensation under the plan, and such amount is includible in income only when paid

to the service provider in accordance with this section. In addition, with respect to this

amount includible in income under § 409A(a), the service provider is required to pay the

additional 20% tax, but is not required to pay the premium interest tax.

2. Amounts to which § VI.C Applies

This § VI.C applies if during a service provider’s taxable year an operational

failure occurs that is described in § VI.C.2(a) and the requirements of § VI.C.2(b)

through (d) and §§ VI.C.3 and 4 are met:

(a) A failure is described in this § VI.C.2(a) if, under the terms of the plan and

any applicable deferral election, and § 409A, an amount of deferred compensation

under the plan should have been paid or made available to the service provider during

the service provider’s taxable year, or an amount is treated as deferred compensation

under the plan that should have been paid or made available to the service provider

during the service provider’s taxable year, but such amount erroneously is not paid or

made available to the service provider.

(b) Sections IV.C, V.D and VII.D of this notice do not apply because relief is not

available under such sections with respect to the failure, the failure is not corrected

under such sections, or otherwise.

(c) The amount that should have been paid or made available to the service

provider during that service provider’s taxable year does not exceed the limit on elective

41

deferrals that would apply to a qualified plan under § 402(g)(1)(B) for such year. For

purposes of this section, the plan includes any arrangements treated as a single plan

under § 1.409A-1(c), so that this section will apply only if any and all erroneous

deferrals under the plan, in the aggregate, of amounts that otherwise should have been

paid during the service provider’s taxable year to the service provider do not exceed the

applicable limit on elective deferrals that would apply to a qualified plan under

§ 402(g)(1)(B).

(d) By the end of the service provider’s second taxable year following the year in

which the failure occurred, the service recipient pays the service provider the amount

that should have been paid or made available to the service provider.

3. Reporting and Withholding

The service recipient must report such payment on a Form W-2 or Form 1099, as

applicable, for the year of the payment in accordance with the requirements of this

section. If the service recipient properly reports the payment as includible in income

under § 409A on a Form W-2, if applicable, for the year in which the payment was

made, including reporting such amount on Form W-2, Box 12 using Code Z, the service

recipient will not be subject to penalties or liability for the failure to properly withhold

under § 3402(d). The service provider must include such amount in income and pay the

additional taxes under § 409A(a) as described in this section on an original or amended

federal income tax return.


Any earnings allocable to such amounts through the date of the payment must

either be forfeited or added to the payment to the service provider, and any losses

42

allocable to such amounts through the date of the payment must either be permanently

disregarded or subtracted from the payment to the service provider.

5. Example

It is assumed for purposes of the following example that Employee is an

individual whose taxable year is the calendar year and Employee and Employer both

satisfy the applicable requirements of §§ III and IX of this notice.

Example: Employee makes a timely election to defer 8% of a bonus payable in

2009 into an account balance plan. The bonus is $100,000. Employer erroneously

defers 10% of the bonus, or $10,000, and pays Employee $90,000 (instead of deferring

$8,000 and paying Employee $92,000). Employer discovers the error on February 1,

2010. On March 1, 2010, at which time Employee’s account balance includes $150 in

earnings on the excess $2,000 credited to the account, Employer pays Employee

$2,150. Employer reports the $2,150 as income under § 409A on the 2010 Form W-2,

Box 1 and Box 12, using Code Z. Provided that Employee reports such income and

pays the applicable taxes, including the additional § 409A taxes, on a 2010 Form 1040,

Employee is not required to include any additional amounts deferred under the plan in

income under § 409A(a) or to include any amount in income under § 409A for years

before 2010, and with respect to the $2,150 includible in income under § 409A is

required to pay only the additional 20% tax (or $425 in additional income tax), and not

the premium interest tax. Employer may also have paid Employee only the $2,000

excess deferred amount if the $150 in earnings on such amount were forfeited.

VII. RELIEF FOR CERTAIN OTHER OPERATIONAL FAILURES A. General Requirements

43

If an operational failure to comply with § 409A(a) occurs but the operational

failure qualifies for the relief provided in this § VII and is corrected in accordance with

this § VII, the amount required to be included in income under § 409A(a) as a result of

the failure, and the resulting additional taxes under § 409A, are limited in accordance

with the provisions of this section. The relief provided by this section is not available

with respect to any failure unless all of the requirements of this section (including any

requirement to file an original or amended return, but not the requirements of § IX of this

notice) have been satisfied not later than the end of the second taxable year of the

service provider following the taxable year of the service provider in which such failure

occurred.

B. Failure to Defer Amount not Corrected in the Same Taxable Year and Certain Erroneous Payments

1. Relief for Amounts to which § VII.B Applies

With respect to amounts to which §VII.B applies, the amount includible in income

under § 409A(a) as a result of a payment described in § VII.B.2(a) is limited to the

amount that should have been treated as deferred compensation under the plan (or





§ 409A(a)(1)(B)(i)(II) (the additional 20% tax) for the year in which the amount is

includible in income under § 409A(a) (the year of the failure), but is not required to pay

the additional tax under § 409A(a)(1)(B)(i)(I) (the premium interest tax). If the

requirements of this section are met, for taxable years following the year during which

44

the failure occurred, the amount repaid by the service provider is treated as an amount

previously included in income for purposes of § 409A(c).

2. Amounts to which § VII.B Applies

This § VII.B applies if during a service provider’s taxable year an operational

failure occurs that is described in § VII.B.2(a) and the requirements of § VII.B.2(b)

through (d) and §§ VII.B.3 and 4 are met:

(a) A failure is described in this § VII.B.2(a) if an amount of nonqualified deferred



year of the service provider, was erroneously paid or made available to the service

provider in that year, and such payment does not fail to meet the requirements of

§ 409A(a)(2)(B)(i) (requirement to delay for six months payments of a specified

employee upon separation from service). For rules relating to correction of certain

payments that fail to meet such requirements, see § VII.C of this notice;

(b) Sections IV.A, IV.B, V.B, V.C and VI.B of this notice do not apply because

relief is not available under such sections with respect to such failure, the failure is not

corrected under such sections, or otherwise;

(c) The service provider repays to the service recipient the amount that was

erroneously paid or made available to the service provider on or before the last day of

the service provider’s second taxable year following the year in which the erroneous

overpayment occurred, and immediately after such repayment the service provider has

a legally binding right under the plan to be paid the amount that would have been due if

such amount had not been erroneously paid or made available to the service provider,

45

at the same time and in the same form of payment that the amount would have been

payable if such amount had not been erroneously paid or made available to the service

provider.

(d) If the service provider is an insider (as defined in this § III.G) with respect to

the service recipient, the service provider pays interest to the service recipient at the

time the service provider repays the amount to the service recipient at a rate not less

than the short-term applicable Federal rate (AFR) under § 1274(d)(1), based on annual

compounding, for the month in which the erroneous payment was paid or made

available, compounded as of the end of the service provider’s taxable year. For this

purpose, the interest rate is the short-term AFR for the month in which the erroneous

payment was paid or made available. If the amount paid on a repayment date is less

than the entire erroneous payment, for each repayment date the interest calculation is

applied by substituting the unpaid balance immediately before the repayment for the

amount of the erroneous payment.


The service recipient must report the erroneous payment as an amount includible

in income under § 409A on a Form W-2 (or Form W-2c), under Box 12, Code Z, or Form

1099 (or corrected Form 1099), as applicable, for the year in which the erroneous

payment was made. The service provider must include the amount of the erroneous

payment in income under § 409A on and pay the additional taxes under § 409A(a) with

an original or amended federal income tax return for the year in which the erroneous

payment was made, and must not claim a deduction or other adjustment reflecting the

46

repayment for the year in which the service provider repays the amount to the service

recipient.


For purposes of this § VII.B, the service provider’s account balance or other






adjustment must be made on or before the applicable deadline for repayment.

5. Example


individual whose taxable year is the calendar year, at all relevant times Employee is not

an insider with respect to Employer as defined in § III.G, and Employee and Employer

both satisfy the applicable requirements of §§ III and IX of this notice.


2008 pursuant to an account balance plan. The bonus is $300,000. Employer

erroneously defers only 25% of the bonus, or $75,000, and pays Employee $225,000

(instead of deferring $150,000 and paying Employee $150,000). Employer discovers

the error on June 1, 2010. Employee pays $75,000 to Employer on July 1, 2010 (or

alternatively, Employer retains $75,000 of compensation that Employee was otherwise

due on July 1, 2010). As a payment to Employee, Employer must treat the 2008

payment as a wage payment for employment tax and reporting purposes, as

47

appropriate, including reporting as income and wages on the 2008 Form W-2.

Employer is permitted to report as income under § 409A on the 2008 Form W-2 (or

2008 Form W-2c), Box 12, using Code Z, only $75,000, and Employee is permitted to

include in income under § 409A for 2008 only $75,000. Furthermore, for 2008

Employee is permitted to pay the additional 20% tax only with respect to the $75,000 (or

$15,000 in additional income tax), and is not required to pay the premium interest tax.

The 2010 Form W-2 provided to the Employee must not reflect any reduction in income

due to the repayment, including if the repayment were made through the reduction in

compensation otherwise payable to the Employee, and Employee is not permitted a

deduction or any other adjustment to income on Employee’s 2010 Form 1040 reflecting

the repayment. For future taxable years, Employee is treated for purposes of § 409A(c)

as having previously included in income $75,000 of the amount deferred under the plan.

C. Incorrect Payment of Amount Payable in Same Taxable Year or Incorrect Payment in Violation of § 409A(a)(2)(B)(i) not Corrected in the Same Taxable Year as the Failure

1. Relief for Amounts to which § VII.C Applies

With respect to amounts to which § VII.C applies, the amount includible in

income under § 409A(a) as a result of a payment described in § VII.C.2(a) is limited to

the amount that should have been treated as deferred compensation under the plan (or





§ 409A(a)(1)(B)(i)(II) (the additional 20% tax), but is not required to pay the additional

tax under § 409A(a)(1)(B)(i)(I) (the premium interest tax). Provided that the

48

requirements of this section are met, for taxable years following the year during which

the failure occurred, the amount repaid by the service provider is treated as an amount

previously included in income for purposes of § 409A(c).

2. Amounts to which § VII.C Applies

This § VII.C applies if during a service provider’s taxable year an operational

failure occurs that is described in § VII.C.2(a) and the requirements of § VII.C.2(b)

through (d) and §§ VII.C.3 and 4 are met.

(a) A failure is described in this § VII.C.2(a) if an amount of nonqualified deferred



the same taxable year, erroneously was paid or made available to the service provider

during such taxable year more than 30 days before such later date, or an amount of

nonqualified deferred compensation that, under the terms of the plan and any applicable

deferral election, and § 409A(a)(2)(B)(i) (requirement to delay for six months payments

to a specified employee upon separation from service), (i) would have been payable

less than six months after the service provider’s separation from service if the service

provider had not been a specified employee, (ii) because the service provider was a

specified employee the amounts should not have been paid or made available within

the six-month period following the service provider’s separation from service, and (iii)

such amounts were erroneously paid or made available to the service provider within

such six-month period.

49

(b) Sections IV.B, V.C, and VI.B of this notice do not apply because relief is not

available under such sections with respect to such failure, the failure is not corrected

under such sections, or otherwise.

(c) On or before the end of the second taxable year during which the failure

occurred, the service provider repays to the service recipient the amount that was

erroneously paid or made available to the service provider.

(d) Immediately after such repayment, the service provider has a legally binding

right to receive such amount from the service recipient on the date that is that same

number of days after the amount is repaid as the number of days from the date the

service recipient made the erroneous payment to the service provider through the date

the amount would otherwise have been payable under the terms of the plan and the

applicable deferral election, and the repaid amount is not paid or made available to the

service provider before such date (for rules regarding the counting of days, see § III.H of

this notice).


The service recipient must report the erroneous payment as an amount includible

in income under § 409A on a Form W-2 (or Form W-2c), under Box 12, Code Z, or Form

1099 (or corrected Form 1099), as applicable, for the year in which the erroneous

payment was made. The service provider must include the amount of the erroneous

payment in income under § 409A on and pay the additional taxes under § 409A(a) with

an original or amended federal income tax return for the year in which the erroneous

payment was made, and not claim a deduction or other adjustment reflecting the

50

repayment for the year in which the service provider repays the amount to the service

recipient.


For purposes of this § VII.C, the service provider’s account balance or other





5. Examples

In each of the following examples, it is assumed that Specified Employee is an

individual whose taxable year is the calendar year, at all relevant times Specified

Employee is a specified employee of Employer for purposes of § 409A(a)(2)(B)(i) and

an insider with respect to Employer as defined in § III.G of this notice, and Specified

Employee and Employer both satisfy the applicable requirements of §§ III and IX of this

notice.


Employer, Specified Employee has a legally binding right to a $100,000 payment of

deferred compensation on the first day of the seventh month following Specified

Employee’s separation from service. Specified Employee separates from service on

November 15, 2008 so that the payment is due on June 1, 2009. Employer erroneously

pays Specified Employee $100,000 on April 1, 2009 (61 days before the due date).

Employer discovers the error on July 1, 2010, and Specified Employee repays the

$100,000 to Employer on July 1, 2010. Immediately after such repayment Specified

51

Employee has a legally binding right to receive $100,000 from Employer on August 31,

2010 (61 days after the July 1, 2010 repayment date) and Employer does not repay the

amount to Specified Employee before that date. Employer treats the payment as a

2009 wage payment for employment tax and reporting purposes, as appropriate,

including reporting as income and wages on the 2009 Form W-2. Employer must report

as income under § 409A on the 2009 Form W-2 (or 2009 Form W-2c), Box 12, using

Code Z, only the $100,000 payment, and Specified Employee is permitted to include in

income under § 409A for 2009 only $100,000. Furthermore, Specified Employee is

permitted to pay the additional 20% tax only with respect to the $100,000 (or $20,000 in

additional income tax), and is not required to pay the premium interest tax. The 2010

Form W-2 provided to Specified Employee must not reflect any reduction in income due

to the repayment, including if the repayment were made through the reduction in

compensation otherwise payable to Specified Employee, and Specified Employee is not

permitted a deduction or any other adjustment to the 2010 Form 1040 reflecting the

repayment. For 2010, Specified Employee is treated as having previously included in

income $100,000 of the amount deferred under the plan for purposes of § 409A(c).


Employer, Specified Employee has a legally binding right to a $100,000 payment of

deferred compensation on the specified date of July 1, 2009 (so that the payment is not

subject to § 409A(a)(2)(B)(i)). Employer erroneously pays Specified Employee the

$100,000 on May 1, 2009 (61 days before the due date). Employer discovers the error

on December 1, 2010, and Specified Employee repays the amount to Employer on

December 1, 2010. Immediately after such repayment Specified Employee has a

52

legally binding right to receive the amount from Employer on January 31, 2011 (61 days

after the December 1, 2010 repayment date) and Employer does not repay the amount

to Specified Employee before that date. Employer treats the 2009 payment as a wage

payment for employment tax and reporting purposes, as appropriate, including reporting

as income and wages on the 2009 Form W-2. Employer is permitted to report as

income under § 409A on the 2009 Form W-2 (or 2008 Form W-2c), Box 12, using Code

Z, only the $100,000 payment, and Specified Employee is permitted to include in

income under § 409A for 2009 only $100,000. Furthermore, Employee is permitted to

pay the additional 20% tax only with respect to the $100,000 (or $20,000 in additional

income tax), and is not required to pay the premium interest tax. The 2010 Form W-2

provided to Specified Employee must not reflect any reduction in income due to the

repayment, including if the repayment were made through the reduction in

compensation otherwise payable to Specified Employee, and Specified Employee is not

permitted a deduction or any other adjustment to the 2010 Form 1040 reflecting the

repayment. Beginning with the taxable year 2010, Specified Employee is treated as

having previously included in income $100,000 of the amount deferred under the plan

for purposes of § 409A(c).

D. Excess Deferred Amount not Corrected in the Same Taxable Year

1. Relief for Amounts to which § VII.D Applies

With respect to amounts to which § VII.D applies, the amount includible in

income under § 409A(a) as a result of a failure described in § VII.D.2(a) is limited to the

excess amount paid to the service provider, and does not include any other deferred

compensation under the plan, and the amount is includible in income only when paid to

53

the service provider in accordance with this section. In addition, with respect to this

amount includible in income under § 409A(a), the service provider is required to pay the

additional 20% tax, but is not required to pay the premium interest tax. Provided that

the service provider includes such amount in income, pays the additional taxes and

otherwise meets the requirements of this notice, for taxable years after the year of the

failure the amount is treated as previously included in income for purposes of § 409A(c).

2. Amounts to which § VII.D. Applies

This § VII.D applies if an operational failure occurs during a service provider’s

taxable year that is described in § VII.D.2(a) and the requirements of § VII.D.2(b)

through (c) and §§ VII.D.3 and 4 are met.

(a) A failure is described in this § VII.D.2(a) if, under the terms of the plan and

any applicable deferral election, and § 409A, an amount of deferred compensation

under the plan should have been paid or made available to the service provider during

the service provider’s taxable year, or an amount is treated as deferred compensation

under the plan that should have been paid or made available to the service provider

during the service provider’s taxable year, but such amount erroneously is not paid or

made available to the service provider;

(b) Sections IV.C, V.D and VI.C of this notice do not apply because relief is not

available under such sections with respect to the failure, the failure is not corrected

under such sections, or otherwise;

(c) By the end of the service provider’s second taxable year following the taxable

year during which the failure occurred, the service recipient pays the service provider

the amount that should have been paid or made available to the service provider.

54


The service recipient must report such payment on a Form W-2 (or Form W-2c)

or Form 1099 (or corrected Form 1099), as applicable, for the taxable year in which the

payment was scheduled to be made under the terms of the plan (or, in the case of an

amount that should not have been deferred, the taxable year in which the payment was

scheduled to be made but for the erroneous deferral). If the service recipient properly

reports the payment as includible in income under § 409A on a Form W-2, if applicable,

for the year in which the payment was scheduled to be made, including reporting such

amount on Form W-2, Box 12 using Code Z, the service recipient will not be subject to

penalties or liability for the failure to properly withhold under § 3402(d). The service

provider must include such amount in income on and pay the additional taxes under

§ 409A(a) with an original or amended federal income tax return for the taxable year in

which the payment was scheduled to be made under the terms of the plan (or, in the

case of an amount that should not have been deferred, the taxable year in which the

payment was scheduled to be made but for the erroneous deferral).


The remaining account balance (or other deferred compensation under the plan)

must be adjusted for earnings and may be adjusted for losses retroactive to the date the

excess amount was incorrectly credited to the service provider’s account or otherwise



amount was paid to the service provider under § VII.D.2(c). The service recipient may

55

not pay the service provider interest, or otherwise compensate the service provider for

the use of such funds.

5. Example


individual whose taxable year is the calendar year, at all relevant times Employee is an

insider with respect to Employee as defined in § III.G of this notice, and Employee and

Employer both satisfy the applicable requirements of §§ III and IX of this notice.


2009 into an account balance plan. The bonus is $300,000. Employer erroneously

defers 20% of the bonus, or $60,000, and pays Employee $240,000 (instead of

deferring $30,000 and paying Employee $270,000). Employer discovers the error on

February 1, 2010, so that the excess deferred amount of $30,000 is not corrected by

December 31, 2009. On March 1, 2010, at which time Employee’s account balance

includes $1,500 in earnings on the excess $30,000 credited to the account, Employer

pays Employee $30,000 and Employee forfeits the $1,500 in earnings. Employer

reports the $30,000 as income under § 409A on the 2009 Form W-2, Box 1 and Box 12,

using Code Z. Provided that Employee reports such income and pays the applicable

taxes, including the additional § 409A taxes, on a timely filed 2009 Form 1040 (or

amended 2009 Form 1040), and satisfies the other applicable requirements of this § VII,

Employee is permitted to include in income under § 409A only $30,000 and to pay only

the additional 20% tax (or $6,000 in additional income tax), and not the premium

interest tax. Beginning with the taxable year 2010, Specified Employee is treated as

56

having previously included in income $30,000 of the amount deferred under the plan for

purposes of § 409A(c).

VIII. SPECIAL TRANSITION RULE FOR NON-INSIDERS

With respect to a service provider that was not an insider at any time during the

service provider’s taxable year in which a failure occurred, such service provider may

use the relief provided in § V.B, § V.C or § V.D of this notice with respect to an

operational failure addressed by such sections that occurred on or before December 31,

2007, in which case for purposes of applying such section the service provider’s taxable

ending in 2009 will be treated as the taxable year next following the taxable year during

which the failure occurred. With respect to an erroneous early payment addressed by

§ V.B, if the original due date for the payment would have occurred on or before

December 31, 2009, the amount may be treated for purposes of applying § V.B as

otherwise payable under the terms of the plan during the year immediately following the

year of the failure for purposes of qualifying for the relief.

IX. INFORMATION AND REPORTING REQUIREMENTS

A. Information Required with Respect to Correction of an Operational Failure in the Same Taxable Year as the Failure Occurs

A service recipient described in § IV of this notice must attach to its timely-filed

(including extensions) original federal income tax return for its taxable year in which the

failure occurred a statement entitled “§ 409A Relief under § IV of Notice 2008-113”

setting out the information required by § IX.A.1 of this notice, and must provide to each

service provider affected by such failure a statement entitled “§ 409A Relief under § IV

of Notice 2008-113” setting out the information required by § IX.A.2 of this notice by no

later than the date (with extensions) on which it is required to provide an information

57

return (Form W-2 or Form 1099) to such service provider for the calendar year in which

such failure occurred (or if no information return is required for such service provider,

not later than the January 31 following the calendar year in which such failure occurred).

Notwithstanding the foregoing, to qualify for the relief described in § IV.D of this notice

(Correction of Exercise Price of Otherwise Excluded Stock Rights), the service recipient

is not required to provide a statement to such service provider with respect to such

failure. In addition, each taxpayer relying on the relief provided in § IV of this notice

must make reasonable efforts to provide notice to the examining agent upon the

commencement of an examination of such taxpayer’s federal tax return that the

taxpayer was relying upon the relief provided under this notice for years covered by the

examination (except in the case of a service provider for whom a correction has been

made under § IV.D of this notice).

1. Attachment to Service Recipient Tax Return for Failures Described in § IV

The service recipient must attach a statement to its federal income tax return

stating that it is relying upon § IV of this notice with respect to a correction of a failure to

comply with § 409A and setting out the following information with respect to each such

failure:

(a) The name and taxpayer identification number of each service provider

affected by the failure and whether such service provider is an insider with respect to

the service recipient. Where the same or a substantially similar operational failure has

occurred with respect to multiple service providers, the information required in

§ IX.A.1(b) through (e) of this notice may be supplied only once with respect to such

operational failure, provided that the identification of each service provider affected by

58

the operational failure in this § IX.A.1(a) references such information and the amount

involved in the operational failure with respect to such service provider.

(b) Identification of the nonqualified deferred compensation plan with respect to

which such failure occurred.

(c) A brief description of the failure and the circumstances under which it

occurred, including the amount involved and date on which the failure occurred.

(d) A brief description of the steps taken to correct the failure and the date on

which such correction was completed.

(e) A statement that the operational failure is eligible for the correction under the

terms of this notice, and that the service recipient has taken all actions required, and

otherwise met all requirements, for such correction.

2. Information to be Provided to Service Provider for Failures Described in § IV

The service recipient must provide the following information to each service

provider affected by correction of a failure to comply with § 409A who is entitled to relief

under § IV of this notice (other than § IV.D of this notice (Correction of Exercise Price of

Otherwise Excluded Stock Rights)) with respect to such failure:

(a) A statement that the service provider is entitled to the relief provided in § IV

of this notice with respect to a failure to comply with § 409A.

(b) The information described in § IX.A.1(b) through (e) of this notice.

B. Information Required with Respect to Relief for Certain Operational Failures

A service recipient described in § V, § VI, or § VII of this notice must attach to its

timely-filed (including extensions) original federal income tax return for its taxable year

in which it discovers the failure, and for a service recipient described in § VIII of this

notice its timely-failed (including extensions) original federal income tax return for the

59

taxable year including January 1, 2009, a statement entitled “§ 409A Relief under

§ [INSERT APPROPRIATE SECTION] of Notice 2008-113” setting out the information

required by § IX.B.1 of this notice. In addition, not later than the date (with extensions)

on which it is required to provide an information return (Form W-2 or 1099) for the

calendar year in which it discovers such failure to a service provider who is affected by

such failure (or if no information return is required for such service provider, not later

than the January 31 following the calendar year in which it discovers such failure), or in

the case of a service recipient described in § VIII, not later than January 31, 2010, must

provide to each such service provider a statement entitled “§ 409A Relief under §

[INSERT APPROPRIATE SECTION] of Notice 2008-113” setting out the information

required by § IX.B.2 of this notice. A service provider who is relying on the relief

provided in § V, § VI, or § VII of this notice with respect to a failure to comply with

§ 409A must attach to the service provider’s timely-filed (including extensions) original

federal income tax return for the year in which such failure was discovered (or for a

service provider who is relying on the relief provided in § VIII of this notice, the service

provider’s timely-filed (including extensions) original federal income tax return for 2009)

the information required by § IX.B.3 of this notice. In addition, each taxpayer relying on

the relief provided in § V, § VI, § VII or § VIII of this notice must make reasonable efforts

to provide notice to the examining agent upon the commencement of an examination of

such taxpayer’s federal tax return that the taxpayer was relying upon the relief provided

under this notice for years covered by the examination.

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1. Attachment to Service Recipient Tax Return for Failures Described in § V, § VI, § VII or § VIII.

The service recipient must attach a statement to its return setting out the

following information with respect to each failure described in § V, § VI, § VII or § VIII of

this notice:

(a) The name and taxpayer identification number of each service provider

affected by the failure. Where the same or a substantially similar operational failure has

occurred with respect to multiple service providers, the information required in

§ IX.B.1(b) through (e) of this notice may be supplied only once with respect to such

operational failure, provided that the identification of each service provider affected by

the operational failure in this § IX.B.1(a) references such information and the amount

involved in the operational failure with respect to such service provider.

(b) Identification of the nonqualified deferred compensation plan with respect to

which such failure occurred.

(c) A brief description of the failure and the circumstances under which it

occurred, including the amount involved and date on which the failure occurred.

(d) A brief description of the steps taken by the service recipient to avoid a

recurrence of the failure, including the date on which such steps were implemented.

(e) A statement that the operational failure is eligible for the correction under the

terms of this notice, and that the service recipient has taken all actions required, and

otherwise met all requirements, for such correction.

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2. Information to be Provided to Service Provider for Failures Described in § V, § VI, § VII or § VIII

The service recipient must provide the following information to each service

provider affected by a failure to comply with § 409A who is entitled to relief under § V,

§ VI, § VII or § VIII of this notice with respect to such failure:

(a) A statement that the service provider is entitled to the relief provided in § V,

§ VI, § VII, or § VIII of this notice (as applicable) with respect to a failure to comply with

§ 409A and that the service provider must attach a copy of the statement to the service

provider’s income tax return for the taxable year in which the failure was discovered.

(b) The information described in § IX.B.1(b) through (e) of this notice.

3. Attachment to Service Provider Tax Return for Failures Described in § V, § VI, § VII or § VIII.

The service provider must attach to the service provider’s income tax return a

copy of the statement the service provider received from the service recipient with

respect to each such failure.

X. EFFECT ON OTHER DOCUMENTS

For taxable years beginning on or after January 1, 2009, Notice 2007-100 is

obsoleted. Taxpayers may rely on this Notice 2008-113 for taxable years beginning

before January 1, 2009. For service recipients and service providers who are entitled to

relief under this notice, Notice 2006-100, 2006-51 IRB 1109 (relating to reporting and

wage withholding for 2006), and Notice 2007-89, 2007-46 IRB 998 (relating to reporting

and wage withholding for 2007), are modified to conform to the provisions of this notice

with respect to (i) the amount that is required to be included in income by a service

provider under section 409A(a), and (ii) the amount that is required to be reported by

the service recipient as an amount includible in income under section 409A(a) on Form

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W-2, Box 1 and Box 12, using Code Z, or Form 1099-MISC, Box 7 and Box 15b, as

applicable.

XI. REQUEST FOR COMMENTS The Treasury Department and the IRS are considering whether to extend the

ability of certain service providers to repay an incorrect payment of a deferred amount

over an extended period if the service provider would otherwise experience an

immediate and heavy financial need as defined in §1.401(k)-1(d)(3)(iii) due to the

repayment requirement to the relief provided in § VIII, subject to the service provider

submitting an appropriate extension of the statute of limitations on assessment with

respect to the taxable year in which the failure occurred. Comments are requested on

all aspects of such potential relief, including whether such relief would be utilized and

how such relief would be implemented.

The Treasury Department and the IRS are also considering whether a program

providing relief in the case of a plan document failure that is brought into compliance

with § 409A would be both feasible and advisable. To the extent such a program is

adopted, the Treasury Department and the IRS intend that such guidance not allow

taxpayers who sponsor or participate in a noncompliant plan an advantage in

comparison to taxpayers who sponsor or participate in a compliant plan, by providing

the sponsor of, or the participants in, the noncompliant plan greater flexibility to change

the time and form of payment of deferred amounts than would have been available if no

such plan document failure had occurred. In addition, the Treasury Department and the

IRS intend that such a program maintain strong incentives for taxpayers to comply in full

with the requirements of § 409A.

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The Treasury Department and the IRS request comments on all aspects of such

a potential program, including how such a program would apply to provisions governing

the timing of deferral elections as well as provisions governing the times and forms of

payments of amounts deferred. The Treasury Department and the IRS specifically

request comments on the following issues:

What types of failures would be eligible for the relief (and what types of failures

would not be eligible for the relief)?

Should relief be limited to minor or nonmaterial errors and if so how would the

materiality of a failure be determined?

To the extent eligibility for the relief is contingent upon whether a noncompliant

plan provision has been put into effect, or whether a noncompliant plan provision

is applicable to or affects an amount deferred, what standards would apply to

determine whether such a noncompliant plan provision has been put into effect

or otherwise applies to or affects an amount deferred?

What rules would govern the appropriate correction for the noncompliant plan

provision and how would such rules avoid granting an impermissible late

subsequent deferral election or election to accelerate a payment?

How would the correction and relief apply if the correction were made during the

service provider’s taxable year and would there be any distinction between

amounts deferred before the correction and amounts deferred in the same year

but after the correction?

What information would service providers and service recipients be required to

file with the IRS to make use of such correction procedure?

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What procedure would service recipients be required to implement to prevent a

recurrence of the same or a substantially similar plan document failure?

Comments must be submitted by March 6, 2009. All materials submitted will be

available for public inspection and copying. Comments may be submitted to Internal

Revenue Service, CC:PA:LPD:RU (Notice 2008-113), Room 5203, PO Box 7604, Ben

Franklin Station, Washington, DC 20044. Submissions may also be hand-delivered

Monday through Friday between the hours of 8 a.m. and 4 p.m. to the Courier’s Desk at

1111 Constitution Avenue, NW, Washington, DC 20224, Attn: CC:PA:LPD:RU (Notice

2008-113), Room 5203. Submissions may also be sent electronically via the internet to

the following email address: [email protected]. Include the

notice number (Notice 2008-113) in the subject line.

XII. PAPERWORK REDUCTION ACT The collection of information contained in this notice has been reviewed and

approved by the Office of Management and Budget in accordance with the Paperwork

Reduction Act (44 USC. 3507) under control number 1545-2086.

An agency may not conduct or sponsor, and a person is not required to respond

to, a collection of information unless the collection of information displays a valid control

number.

The collection of information in this notice is in § IX. This information is required

to determine whether the taxpayers claiming the relief are eligible for the relief and that

the applicable requirements for relief are met. The likely respondents are corporations

and individuals.

The estimated annual reporting and/or recordkeeping burden is 5,000 hours.

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mailto:[email protected]

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The estimated annual burden per respondent/recordkeeper is .5 hours.

The estimated number of respondents is 10,000.

The estimated annual frequency of response is on occasion.

Books or records relating to a collection of information must be retained as long as their

contents may become material in the administration of any internal revenue law.

Generally, tax return and tax return information are confidential, as required by § 6103.

XIII. DRAFTING INFORMATION

The principal author of this notice is Stephen Tackney of the Office of Division

Counsel/Associate Chief Counsel (Tax Exempt and Government Entities), although

other Treasury and IRS officials participated in its development. For further information

on the provisions of this notice, contact Stephen Tackney at (202) 927-9639 (not a toll-

free number).